20 Questions
Directors Should Ask About
special committees
Second edition
This publication was originally published by The Canadian Institute of Chartered Accountants
in 2012. It has been reissued by Chartered Professional Accountants of Canada.
Special Committees
Second edition
Copyright © 2012 The Canadian Institute of Chartered Accountants
All rights reserved. This publication is protected by copyright and written permission is required to reproduce, store in a retrieval system or transmit in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise).
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Library and Archives Canada Cataloguing in Publication Orr, William K. (William Kingston), (date)
20 questions directors should ask about special committees second edition / William K. Orr, Aaron J. Atkinson. ISBN 978-1-55385-703-7
1. Management committees. 2. Directors of corporations. I. Atkinson, Aaron J. II. Canadian Institute of Chartered Accountants III. Title. IV. Title: Twenty questions directors should ask about special committees.
Risk Oversight and
Governance Board
Huw Thomas, CA, Chair Alexandre Guertin, CA Bryan Held, FCA, ICD.D Andrew Foley, J.D. Giles Meikle, FCA
Deborah Rosati, FCA, ICD.D Catherine Smith, ICD.D, FICB John E. Walker, CA, LL.B. Sue Payne, FCA, C.Dir Richard Wilson
Doug Hayhurst, FCA, ICD.D
Directors Advisory Group
Giles Meikle, FCA, Chair Hugh Bolton, FCA John Caldwell, CA
William Dimma, F.ICD, ICD.D Gordon Hall, FSA, ICD.D Carol Hansell, LL.B.
Peter Stephenson, PhD, ICD.D Thomas C. Peddie, FCA
Guylaine Saucier, CM, FCA, F.ICD Hap Stephen, CA
Janet Woodruff, FCA, ICD.D
CICA Staff
Gigi Dawe
Principal, Risk Oversight and Governance Rayna Shienfield, J.D.
Principal, Risk Oversight and Governance Gord Beal
Director, Guidance and Support
Preface
The Risk Oversight and Governance Board (ROGB) of the Canadian Institute of Chartered Accountants (CICA) has developed this publication to help boards of directors when the need for a special committee arises.
Special committees, established on an ad hoc basis, are used by directors as a procedural decision mak-ing tool to deliver recommendations to the board. Such committees are often established in a short period of time and under increased tension within the organization. However, it is essential that the committee is properly established and empowered and carries out an appropriate committee process. While there is no one set of rules that apply to all situations, there are general principles that can help guide directors in this task. This publication outlines the preliminary matters to consider in establishing a special committee, as well as its establishment and organization. It describes the committee’s duties and liabilities, and the establishment of an appropri-ate process to aid the board and special committee in undertaking this task.
The ROGB acknowledges and thanks the members of the Directors Advisory Group for their invaluable advice, the authors William K. Orr and Aaron J. Atkinson and the CICA staff who provided support for the project.
Huw Thomas, CA
Contents
Introduction
Part I – Preliminary Matters
1. Why should a board establish a special committee?
2. How does a special committee process assist the board in discharging its duties?
a) Directors’ Duties
b) Business Judgment Rule c) Delegation of Authority
3. Does a director assume added liability by serving on a special committee?
Part II – Establishment
and Organization
4. When should a board establish a special committee?
5. What is the committee’s mandate?
6. Who should serve on a special committee? a) Independence
b) Expertise and Experience
c) Time Commitment and Other Factors 7. What factors are considered in assessing the
independence of a committee member? 8. What action should be taken if a committee
member later becomes conflicted?
9. How should members of a special committee be compensated?
a) Compensation Structure b) Amount of Compensation
10. Will the establishment of a special committee or its activities require public disclosure?
Part III – Duties and Liabilities
11. What principles should guide the committee in the discharge of its mandate?
a) Independence and Integrity of Process b) Consideration of Stakeholder Interests c) Ensure Adequate Investigation
and Review of Information d) Decision Within a Range of
Reasonable Alternatives
12. When should a committee engage outside experts?
a) Engaging Experts b) Role of Experts c) Reliance on Experts
13. What factors should be considered when selecting and engaging outside experts? a) Impartiality of Advice
b) Experience and Reputation c) Compensation
14. Are communications between committee members and its experts protected against disclosure to third parties?
a) Privilege of Communications with Legal Counsel
b) Communications with Other Experts c) Communications among
Committee Members
15. What steps can committee members take to protect against personal financial exposure? a) D&O Insurance
b) Indemnities
Part IV – Process and
Deliberations
16. How can the committee ensure the independence of its process? a) Control Over Meeting and
Reporting Process b) Committee Chair
c) Control Over Engaging Outside Experts
d) Meeting in camera
e) Documentation of Deliberations — Minutes 17. What is the role of management and the board of
directors in the committee’s process? a) Management
b) Board of Directors
18. How should the committee report to the board? 19. Are the committee’s reports and conclusions
protected against disclosure to third parties? 20. What is the board’s role in reviewing the reports
and conclusions of the committee?
Appendix “A”
Sample Mandate — M&A
Transaction
Appendix “B”
Sample Mandate — Internal
Investigation
Where to Find More Information
About the Authors
Introduction
In an era of increasing regulation, public scrutiny and economic turbulence, serving as a public company director presents many challenges. Satisfying all potential constituencies likely to question or challenge a board decision may seem practically impossible. The challenge is particularly acute where a decision involves the company’s reputation or long-term future, such as when allegations of internal wrongdoing surface or the company is under attack from a hostile take-over suitor. A board can expect to have its decisions in these circumstances closely examined by the press, analysts and investors, governance commentators, proxy advisors and, in some cases, regulators and the courts.
While public opinion of board decisions is subject to countless influences, directors in Canada can take comfort from the fact that, from a legal perspective, courts generally will not second-guess a board’s business judgment provided that its decision is reasonable and was made free of conflicts with the benefit of impartial advice. With the benefit of hindsight, outside observers may well, and perhaps rightly, criticize a board’s decision; however, a court’s focus is on the process by which the deci-sion was made rather than whether the decideci-sion itself was the “correct” or “best” one.
A board is therefore well-advised to ensure that the process by which its decision is reached is carried out with proper rigour and independence. A com-mon procedural tool recognized by courts to do so is to establish an ad hoc special committee of unconflicted directors to conduct a detailed review of the issues and deliver a recommendation to the board.
Deceptively simple in concept, the task of properly establishing and empowering a committee and carrying out an appropriate committee process involves the exercise of a substantial amount of judgment in an often truncated time period where tensions already may be heightened within the organization. While a number of “best practices” have developed over time to assist a special com-mittee in discharging its duties, some practices may be unfamiliar to an organization and can give rise to conflict or misunderstandings.
These practices begin with ensuring there is a written mandate appropriate in scope that properly empowers the committee to conduct its delibera-tions independently. The committee’s mandate is its “playbook”, the key standard against which it will be judged, and itself a source of potential tension. A properly empowered committee is generally autho-rized to retain outside legal and other advisors, potentially at significant cost, which can impact the corporate budgeting process. A committee is also generally given control over its meeting protocol and other procedural matters, often carrying out key deliberations alone with its advisors to maintain the independence of its decision-making process. Consequently, such a process may exclude some of the organization’s customary decision-makers, such as executive management or other board members, who are accustomed to being present for key delib-erations and who may well question the wisdom of such a process. Accordingly, a properly functioning committee needs to ensure that its process not only conforms to applicable legal standards, but also addresses the political and practical issues that may arise within the organization.
Given the varied nature of special committees and the circumstances in which they are established, it is not possible to provide one set of rules or guidelines to be equally applied in all cases. The following discussion is designed to provide some general principles, as well as some practical insight, to guide directors in Canada in navigating through the process of establishing a committee and conducting a committee process appropriate for the task at hand.
Part I – Preliminary
Matters
1. Why should a board establish a special committee?
In very few cases does Canadian law expressly mandate that a special committee be established; however, by implication of existing jurisprudence and prevailing governance norms, a board is often well-advised to precede a significant board deci-sion with a review process undertaken by a special committee of independent directors.
A special committee is often established where a board decision raises a concern about potential conflicts of interest. In these circumstances, the establishment of a special committee of independent directors is intended as a procedural safeguard to ensure any decision is made by individuals whose judgment will be unclouded by ancillary interests or considerations. A decision made in this way will carry significant weight with a court in determining whether a board has exercised appropriate “business judgment”.
In other cases, a board may feel that, due to the significance of the decision and the time-frame in which it must be made, a smaller group of direc-tors should undertake an intensive review that the full board would be unable to conduct in the circumstances. In this way, the board ensures that a detailed review is completed efficiently and is freed from the practical constraints of corralling the full board for several meetings in a short time-frame. Some of the more common circumstances in which a board may choose to establish a special commit-tee include the following:
• Where a company is facing a potential change of control transaction, whether by way of an unsolicited take-over offer or an auction process, a board will typically establish a special committee comprised of non-management directors independent of significant sharehold-ers to evaluate offsharehold-ers and consider alternatives and appropriate defensive measures. Boards often choose to establish a special committee in change of control scenarios, even in the absence of a hostile bidder or an auction, such as in the
case of a friendly transaction with a strategic buyer. Such a committee can be expected to ensure an impartial evaluation of the merits of any particular transaction, taking into account affected stakeholder interests.
• A board may determine that an evaluation of strategic alternatives is necessary. These alterna-tives may include a significant change in the direction of the business, or a recapitalization, reorganization or sale of the company. In these circumstances, the board may wish to appoint a special committee of directors to evaluate these alternatives with the assistance of senior manage-ment and, potentially, outside financial and legal advisors. A committee in these circumstances can be expected to face many of the same issues as a committee established to consider a change of control transaction.
• Where a transaction involves a related party to the organization, such as in a manage-ment buy-out, a board will establish a special committee of directors independent of the related party to negotiate on behalf of the organi-zation. In these circumstances, the committee can be expected to attempt to ensure, to the extent possible, an “arm’s length” bargaining process is conducted.
• A board may learn of allegations of potential wrongdoing within the company. Depending
on the circumstances, the board may direct an existing standing committee, such as the audit committee, to investigate the allegations or may establish a special committee for this purpose. A committee conducting such an investigation must do so in a confidential and independent manner to ensure the integrity of the investigation.
• A board may delegate to a special committee the task of reviewing performance issues concerning executive management, including where the board may be losing confidence in one or more key members of executive management. A committee in these circumstances will need to ensure its independence from management and carefully consider succession issues.
• An organization may be approached by one or more shareholders who are seeking changes to the board, management or other changes to the organization or its business practices. The board may appoint a committee in these circum-stances to evaluate the merits of the changes being sought and to liaise with the shareholder or group seeking change.
In other circumstances, such as where the board is a manageable size, no particular board member has an identifiable expertise for the proposed task of a committee, and, perhaps most importantly, all board members are free of conflicts, the entire board may desire to undertake the proposed man-date of the committee.
When determining whether to establish a special committee, the board of a public company should also consider other factors, including whether the establishment of the committee itself needs to be disclosed or, as discussed below, when the exis-tence of the committee or fees paid to committee members may require disclosure in the company’s regular continuous disclosure filings. Among other considerations, such disclosure could give rise to unwarranted speculation among investors and analysts.
A board also must consider that establishing a spe-cial committee generally results in additional cost to the organization. For example, as discussed below, committee members generally should receive addi-tional compensation due to the addiaddi-tional time and effort demanded of the committee members over and above their regular board duties. An appropri-ate committee process also typically requires
that the committee be empowered to retain, at the expense of the company, independent legal, financial or other outside expert advisors to assist the committee in discharging its mandate.
2. How does a special committee process assist the board in discharging its duties?
Given the potential for both legal and other scrutiny, any significant board decision should generally be preceded by a process that includes an investigation of the facts giving rise to the need for a decision, an evaluation of the long-term interests of the corporation, and the identification and consideration of the reasonable expectations of stakeholders affected by the decision. Any such process is less likely to be challenged if it is under-taken by a committee of disinterested directors who undertake a proper and independent review, with the assistance of outside experts.
a) Directors’ Duties
A comprehensive discussion of directors’ duties in Canada is beyond the scope of this discussion, so the following provides a necessarily brief summary of key principles that govern directors’ actions in Canada.
A board of directors of a corporation has a statu-tory duty to manage or supervise the management of the business and affairs of the corporation. The directors owe two principal duties to the corporation that govern their obligations in all circumstances:
• a duty of care – directors must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and
• a fiduciary duty of loyalty – directors must act honestly and in good faith with a view to the best interests of the corporation.
For many years, in part due to the influence of United States jurisprudence, the directors’ duty of loyalty was generally viewed as serving the best interests of the shareholders as a whole on the basis that shareholders had entrusted the board with the supervision of the corporation’s affairs. The Supreme Court of Canada subsequently clarified that the fiduciary duty is owed to the corporation and not to shareholders or any other stakeholder.
Furthermore, there is no general overriding principle that one set of interests, such as the interests of shareholders, should prevail over the interests of any other stakeholders. Accordingly, the board’s fiduciary duty is not confined to short-term profit or share value, but is directed instead at the corporation’s long-term interests which may vary depending on the specific facts faced by the directors and requires an assessment of affected stakeholder interests.
In making any decision, the board must identify and consider the impact of its decision on the reasonable expectations of all affected stakehold-ers, which may include, among othstakehold-ers, security holders, creditors, employees, the local community, customers and suppliers. Where the interests of stakeholders conflict, the board must exercise its business judgment to resolve those conflicts in a fair and balanced way, recognizing that there is no general principle that dictates when one particular stakeholder should be favoured over another. The appropriate response by directors to any particular situation is a function of their business judgment of what is in the best interests of the corporation in the particular situation faced by the corporation. b) Business Judgment Rule
In carrying out their duties, directors are expected to act prudently and on a reasonably informed basis. While a high degree of diligence is demanded, the standard is less than perfection. Where a direc-tor’s decision is a reasonable one in light of all the circumstances about which the director knew or ought to have known, courts will not interfere with that decision. The court’s inquiry will generally focus on whether the directors applied an appropriate degree of prudence and diligence in reaching their decisions. The foregoing is also known as the “business judgment rule” and has been strongly endorsed by the Supreme Court of Canada. c) Delegation of Authority
Subject to certain specific exceptions, Canadian corporate law generally permits directors to del-egate powers to a committee of directors; however, the fact that a board delegates the review of a potential decision to a special committee does not absolve the board of further responsibility for that decision. In particular, the board must maintain a reasonable amount of supervision over the
commit-tee’s activities. Typically, the board carries out this function by ensuring that the committee reports to it periodically. During these updates, the board can provide guidance and input into the committee’s process. Of course, the board also must ensure that it does not unduly interfere in the workings of the committee and therefore taint the independence of the committee’s process.
3. Does a director assume added liability by serving on a special committee?
A committee member is not subject to additional legal liability over and above the liability to which a director is subject in other circumstances. Provided an appropriate review process is carried out, a director may take comfort from the protections afforded by the business judgment rule.
In establishing a committee, the board looks to the committee members to undertake a proper review process that will serve to justify the decision ultimately made by the board. As a result, the board maintains a duty to supervise the committee while the committee takes on the role that otherwise would be carried out by the full board. To the extent the board reasonably relies on the committee and exercises appropriate supervision, the committee members take on distinct responsibility not shared by the other board members; however, this respon-sibility does not heighten the legal standard against which the committee members will be judged. As they would with respect to any board decision, the committee members must take their role seriously and most often will want to retain independent experts and advisors to assist in discharging its mandate so that its decision may gain the protec-tion of the business judgment rule.
While a director may be shielded from legal liability regarding a particular decision, that decision may nevertheless be subject to criticism from outside observers. In particular, committee members should consider that their actions could be subject to review by shareholders at the time of the company’s next or subsequent annual meetings. With the prevalence of majority voting policies, it is conceivable that shareholders or influential proxy advisory firms could express concern over actions of the committee by withholding, or recommend-ing withholdrecommend-ing, votes for committee members in subsequent director elections.
Part II – Establishment
and Organization
4. When should a board establish a special committee?
While the potential benefits of incorporating a spe-cial committee review into a board decision-making process should be clear, a competing concern is that a board must exercise care in determining when to establish a committee. On the one hand, a board may want to ensure that a committee is not established prematurely given the potential addi-tional costs involved and potential disclosure issues. A competing consideration is that the committee not be established at a point in the process where alternatives are limited or, in hindsight, the ultimate recommendation of the board is perceived as hav-ing been a foregone conclusion. Like many board decisions, it is a matter of judgment as to when a committee should be established, but the following are some considerations that may be helpful in guiding the decision:
• What are the actual and potential conflicts involved in making the decision and when are they expected to arise?
• What is the likelihood that a decision will have to be made and what is the time-frame in which a decision is required?
• How significant is the potential transaction and what are the implications of the decision on the organization’s various stakeholders?
5. What is the committee’s mandate?
The mere fact that a board has established a committee that undertakes a review process will not in itself shield a board from criticism or potential legal liability. As noted earlier, the committee’s mandate is its “playbook” and the key standard against which it will be judged. Accordingly, a committee process carried out with a limited mandate where a broader mandate is warranted is more likely to be criticized and could be successfully challenged in court, even in circumstances where the committee has acted as if its mandate was broader. In this case, the text of the mandate matters.
Best practices dictate that the committee be estab-lished by a board-approved written mandate with a clear articulation of (i) the tasks to be delegated, (ii) the committee’s authority to discharge those tasks and establish its operating procedures, and (iii) the compensation payable to committee members. Given its importance, a board is well-advised to have outside legal counsel review the committee’s mandate to ensure that it is consistent with prevail-ing governance practices.
A clear mandate adopted at the outset of the com-mittee’s work will clarify the comcom-mittee’s duties and will reduce the possibility of disputes later in the process, including with regard to the scope of the committee’s activities. In addition, the board will have a clear understanding of which tasks remain for consideration by the full board. In some circum-stances, committee members may wish to take an expanded view of their mandated powers.
The findings and recommendations of the com-mittee may be less susceptible to criticism if the committee has been sufficiently empowered. For example, if a committee is charged with the task of conducting an internal investigation but does not have the expertise or time to undertake a forensic investigation itself, the committee should be empowered to retain appropriate outside advisors to assist.
A typical special committee mandate in the M&A context includes the following tasks: (i) considering alternatives available to the company; (ii) consider-ing a canvass of the market and/or solicitation of other proposals; (iii) reviewing proposals; (iv) nego-tiating or supervising the negotiations of proposals; and (v) making a recommendation to the board. A sample mandate in this context is attached as Appendix “A”.
A mandate for a committee established to conduct an internal investigation will have a different focus, including the power to obtain and review internal company records and to determine whether and when public disclosure is necessary. A sample man-date in this context is attached as Appendix “B”.
6. Who should serve on a special committee?
While the prevailing consideration in selecting a committee member should be the individual’s independence, the board also should take into
account a number of other factors, including the individual’s expertise for the task at hand, the availability of the individual to devote the necessary time to participate meaningfully, and the ability of the committee members to work together as a group.
a) Independence
A key to evaluating any committee process is to ensure that the decision at issue is made, and perceived to be made, on the merits, unclouded by outside considerations. As a consequence, all members of a special committee should be free of competing interests that could reasonably be viewed as adversely impacting their judgment. In making this assessment, a perception that outside interests could affect the judgment of a committee member can be as important as the existence of an actual conflict. The importance of any particular outside interest or relationship will depend on the matter under review by the committee.
As a result, consideration of the various technical legal definitions of independence should not be the end of the inquiry. Prospective committee members should disclose any relationships or outside interests that may reasonably give rise to potential conflicts. Conflicts may arise on a num-ber of levels, including in business, professional or family relationships. Deliberations concerning potential conflicts should be documented for the record and, in some cases, may need to be publicly disclosed and explained. In many cases, it may be appropriate to disclose certain relationships that were considered by the board, together with the board’s reasons for determining that the director’s independence was not compromised.
As a result of various regulatory and judicial pronouncements as well as prevailing governance practices, in certain circumstances, certain relationships preclude board members from serv-ing. While there can be no doubt that executive management usually have the best understanding of the day-to-day operations of the organization, an executive who is also a director should not serve on a special committee given the executive’s inherent conflict as an employee of the organiza-tion. While a committee should generally consult with management where its expertise is needed, management should be excluded from the decision-making process.
As another example, a board member who is a representative of a substantial shareholder may need to be excluded to overcome any suggestion that the shareholder’s interest was favoured over those of other stakeholders. In one notable example, a committee established in connection with a take-over bid was found not to be independent where the committee included, as an active participant, the president and chief executive officer of the company and, as an observer and resource, a repre-sentative of a shareholder holding 50% of the votes. In some circumstances, it is possible that directors who are independent for one purpose might be conflicted in other circumstances. For example, where a committee has been established to under-take an investigation of accounting irregularities then, depending on the nature of the allegations, it may be appropriate to exclude members of the audit committee to the extent that the issues call into question activities of the audit committee. b) Expertise and Experience
While independence is a prime consideration in establishing committee membership, it is perhaps equally important to ensure that those on the committee will apply the appropriate degree of rigour and analysis to the matter under review. A board will typically have a mix of experience and expertise, potentially including industry experts, financial experts, those with prior executive management experience and individuals with academic, legal or capital markets credentials. Depending on the mandate of the committee, certain directors’ experience profile may be more suited than others to the matter under review. On occasion, simply having prior experience of serving on a special committee may be a relevant consideration. The experience of a director who has previously navigated through the pitfalls, polit-ical challenges and public scrutiny of a committee process, from selecting and managing advisors to managing various stakeholder expectations, can itself be worthwhile to complement substantive expertise on the committee.
c) Time Commitment and Other Factors Membership on a special committee invariably requires a director to devote a significant amount of time to attend meetings, engage with advisors
and to review substantial materials, often in a very truncated time period and often with short notice. As a result, a director may be otherwise well-qualified to serve on a committee, but due to his or her travel schedule or other commitments, it may be inappropriate for the director to serve on the committee. Notwithstanding a director’s exclusion from the committee in these circumstances, it may be appropriate for the individual to participate in the committee’s process as time allows so that the committee may benefit from his or her experience. While legal and governance norms in large part dictate who should serve on a committee, the working dynamic of the committee is a factor that should not be ignored given that the board will be relying on the committee to function cohesively in a potentially high-pressure situation. A board should not ignore the fact that all directors are human, each with his or her own character traits, leadership qualities and approach to decision-making.
One key factor in considering the committee’s decision-making dynamic is who will serve as committee chair. While this is often an issue best left to the committee to determine, it may be appropriate for the board to select the chair at the outset, particularly where there may be more than one member who would prefer the role. While the committee’s process, as a general rule, should be independent and dictated by the committee, it is appropriate for the board, in exercising its super-visory authority, to take steps to ensure that the committee process will function smoothly.
7. What factors are considered in assessing the independence of a committee member?
The concept of “independence” in the context of an
ad hoc special committee is inherently fact-specific.
As discussed earlier, in certain circumstances, the law or prevailing governance practices may automatically preclude an individual from being considered to be independent. More generally, the board must apply reasonable judgment in assessing whether a relationship between a director and the organization, management, shareholders or others should disqualify the director from serving on the special committee.
The key is to consider whether the committee member’s judgment could be impaired, or, per-haps more importantly, reasonably challenged,
as a result of a particular relationship. Given the potential breadth of the inquiry and the relatively small size of Canada’s public markets, it is possible that every director on a given board will have outside business or other relationships to consider. Canadian courts have recognized that any potential conflict of interest must be balanced against the reasonable benefit to be obtained by appointing a specific individual to serve on the committee. In addition to the foregoing general principles, additional guidance in the analysis can be found in other sources:
• Most Canadian public companies engaged in transactions involving related parties will be subject to special rules (the “Special Transac-tion Rules”). The stated purpose of these rules is to ensure procedural fairness by prescribing additional procedural safeguards in transactions capable of being abusive or unfair. These trans-actions include those where an inequality in the knowledge of the affairs of a company is pre-sumed to exist between the public shareholders and other parties to the transaction, such as in the case of an insider who has nominees on the board and who is seeking to acquire the interest of the public shareholders.
• Under the Special Transaction Rules, certain relationships automatically disqualify a board member from serving as an independent director, including if the director was recently employed by, or has a significant equity interest in, a party to the transaction. While the Special Transaction Rules apply only to specific types of transactions involving public companies, the relationships enumerated in those rules are indicative of the types of relationships that should be considered in all cases.
• In addition to the Special Transaction Rules, directors also should consider the corporate governance guidelines published by the Cana-dian securities regulators (the “Guidelines”). The Guidelines provide recommended best practices for public companies and include recommendations regarding the proportion of independent directors that should serve on a board and certain standing board committees, in addition to prescribing certain relationships that automatically disqualify a board member from being considered independent. While the Guidelines do not specifically address member-ship on ad hoc special committees, the types of
relationships described by the Guidelines should be considered carefully when evaluating the independence of prospective special committee members.
Making any decision about a director’s indepen-dence ultimately involves the exercise of judgment in applying the foregoing guidance to a particular set of facts. For example, where a committee is established to review a proposed transaction with a significant shareholder, the board must consider any material relationships between board members and the significant shareholder. While casual social relationships will not typically give rise to concern, participation in a common but unrelated business venture from which the director derives a significant financial benefit could be sufficient to call into question the director’s ability to make an independent decision.
8. What action should be taken if a committee member later becomes conflicted?
Ideally, the board will have anticipated potential conflicts at the outset of the committee process. For example, where a board is considering a poten-tial change of control transaction, the board should also consider whether any prospective committee members are associated with potential suitors. In those cases, even where it appears unlikely that the potential suitor will be interested in a transaction, the board should consider excluding the relevant director from committee consideration as it is pos-sible that circumstances could change.
Where a conflict does arise, the committee itself should first consider the nature of the conflict as balanced against the benefits to be gained from his or her continued role on the committee. In many cases, it may be appropriate for the committee member to promptly resign from the committee so that the process is not compromised.
Committee members should also keep other com-mittee members and the board apprised of any change in their circumstances that could give rise to questions about their independence.
9. How should members of a special committee be compensated?
a) Compensation Structure
Compensating committee members for their time and effort in fulfilling the committee’s mandate is customary and appropriate. By its very nature, the volume of work undertaken by a special committee is not always easily forseen or priced into the direc-tors’ general board compensation. In many cases the special committee members will be required to spend significant time and effort in order to fulfil the committee’s mandate and to ensure that they have properly discharged their duties.
Compensation arrangements generally involve one or more of the following and are typically paid in cash:
• a flat retainer fee (which in some cases may be expressed as a monthly or quarterly fee), often with the committee chair receiving a greater amount to account for the additional responsi-bilities of the chair;
• a per meeting fee, which may be lower where attendance is by phone given that there is less disruption or travel time involved in attending the meeting (often the quantum is based on the attendance fee paid to the directors for attendance at regular board or other committee meetings); and
• reimbursement of reasonable expenses incurred by committee members in connection with the discharge of their duties, often consistent with the board’s existing expense reimbursement policy.
A per meeting fee is one compensation method to address the potential problem of gauging the extent of the committee’s work at the outset of a committee process. Where the work of the committee turns out to be more intensive than originally anticipated, the per meeting fee can serve to balance a retainer fee that in hindsight could be viewed as providing insufficient compensation. To avoid later disputes and to avoid the appearance of any impropriety, compensation arrangements should be established at the commencement of the special committee’s activities. In transactions governed by the Special Transaction Rules, the securities regulators in Ontario and Quebec are of
the view that compensation of committee members ideally should be set when the committee is created and not success based.
If the compensation structure is not appropriately designed at the outset, it may be difficult to compensate committee members after the fact without raising questions concerning their inde-pendence. For example, on successful completion of an M&A transaction, if committee members are compensated with a “bonus” or other payment in recognition of their efforts, outside observers may question whether such payment was linked in some manner to the outcome of the transaction on which the committee was advising (such as a “success fee”) and therefore could have influenced the com-mittee’s deliberations. In that regard, a member of an independent committee is generally prohibited from receiving any payment or other benefit that is contingent on the completion of a transaction to which the Special Transaction Rules apply.
b) Amount of Compensation
A question on which directors often seek guidance is the appropriate amount of compensation that should be paid to committee members. There are no specific rules governing the quantum of compensation in these circumstances, though some guiding principles may be helpful:
• The board should consider the organization’s general board compensation philosophy and practices.
• The quantum of compensation should not be excessive in relation to the fees paid to board members in connection with their regular board duties or, for that matter, the compensation paid to management.
• As a further reference point, the board also may look to the compensation paid to members of the audit committee, a committee whose indepen-dence is legislatively mandated.
In establishing the compensation structure and quantum of compensation, public company direc-tors should bear in mind that the committee fees ultimately will need to be disclosed to shareholders in a management proxy circular where disclosure of the compensation paid to the company’s directors is required.
Gathering public information regarding committee fees is difficult due to a variety of factors, including the fact that special committee compensation in the context of a change of control transaction may not be reported if the subject company is taken private prior to the company’s next annual meeting (when such fees would have to be disclosed). Based on an informal, “unscientific” survey of available public disclosure in management information circulars and similar public filings in recent years, it is evident that compensation practices are varied, though many compensation arrangements contain the key elements described above.
Providing firm guidance on committee compensa-tion structures is challenging as compensacompensa-tion
arrangements are often driven by the circum-stances of the particular transaction in which the committee is involved, including the size of the company and its general board compensation practices and the substance and scope of the com-mittee’s mandate. For example, a fixed fee of under $10,000 might initially seem insignificant compared to the fees paid in other cases; however, such a fee may be entirely appropriate if, for example, the committee’s work is completed in a very short time or if fees are also paid for attendance at meetings. Based on a review of public filings and anecdotal evidence, typical compensation paid to members of a special committee of a larger TSX-listed company involved in an M&A mandate ranges from approximately $25,000 to $50,000 or more for regular members, with an additional amount paid to the committee chair (in the range of $10,000 to $25,000 or more), plus a fee paid for attendance at committee meetings.
10. Will the establishment of a special committee or its activities require public disclosure?
While the mere fact that a special committee has been established will generally not require public disclosure, the circumstances leading to the creation of the special committee may make it desirable to disclose the existence of the commit-tee, especially where the circumstances are already publicly rumoured or known, or otherwise require disclosure. For example, a company targeted by an unsolicited take-over bid often discloses that a committee has been established so that share-holders are assured that a considered response is underway. In other circumstances, the board may disclose that it has established a special commit-tee to review strategic alternatives or to conduct a public auction. In those circumstances, the company may disclose the committee’s existence as part of a larger strategy designed to put the company “in play”.
A committee must also recognize that, whether its existence is publicly known at the time of formation, its review and decision-making process may need to be disclosed in detail at a later stage:
• In the public M&A context, applicable securi-ties laws typically require detailed disclosure concerning the deliberations of the board and the special committee, including a discussion of any materially contrary view or abstention by a
director and any material disagreement between the board and the special committee.
• In other circumstances, it is possible that a court or regulatory body will fashion a disclosure-based remedy where a board decision is challenged. In those circumstances, it is possible that items such as reports and other materials reviewed and considered by committee members will need to be disclosed.
• In some cases a board may be required to address a particularly sensitive matter which is appropriate to delegate to a special committee, but which the board may wish to maintain in confidence until a decision has been made. For example, a board may wish to have a special committee investigate potential allegations of wrongdoing to determine their legitimacy prior to any public disclosure. In these cases, the board and committee need to be particularly mindful of the ways in which the existence of the committee, and therefore the subject of its review, could be disclosed prematurely.
• As noted earlier, a public company’s regular annual filings may require the disclosure of the committee or, at a minimum, the fees paid to directors, including any committee retainer fees. In some cases where disclosure considerations are particularly sensitive, the board may wish to consider deferring the earning and payment of fees until after this annual disclosure has been made in order to justifiably preserve the confidentiality of the committee’s process, having regard to the best interests of the corporation. Another alternative is to delegate the decision-making authority, at least initially, to an existing standing committee, such as the audit committee or a governance committee, provided that the committee members have the appropriate inde-pendence to carry out the mandate.
As it conducts its review process, the committee and its advisors must be mindful of the potential disclosure record that may need to be produced at a later stage, including by maintaining an inventory of committee materials and keeping reasonably contemporaneous minutes of all formal committee meetings.
Part III – Duties
and Liabilities
11. What principles should guide the committee in the discharge of its mandate?
In discharging its mandate, special committee members should be guided by the principles and expectations implied by the business judgment rule. In general terms, a special committee will need to exercise independent judgment, ensure that it exercises an appropriate level of diligence in the time allotted for its review, and identify, con-sider and manage the reasonable expectations of all affected stakeholders. What follows below are some practical steps that can and generally should be taken by a special committee in discharging its mandate.
a) Independence and Integrity of Process
A special committee will be expected to carry out its mandate independently and exercise indepen-dent judgment, particularly in circumstances where a committee has been established to address real or perceived conflict of interest concerns.
• Ensure independence of committee members: Each member of the special committee should consider the matter under review on its merits, uninhibited by competing outside considerations. As noted earlier, the board should consider the various relationships and interests of the committee members and consider whether those relationships give rise to any conflicts, real or perceived. Committee members themselves should be alert to poten-tial conflicts that may arise at a later stage in the committee’s process and address them promptly.
• Ensure the committee has control over its
process: The special committee’s mandate should
generally provide that it has control over its process, including its meeting protocol, how and when it engages with management and others within the organization, and how and when it engages outside advisors. While the committee often will need to consult with management and others within the organization who are not committee members for information gathering purposes, the committee should ensure that
its deliberations are carried out independently during in camera meetings with its independent advisors.
• Solicit independent advice from outside experts: The special committee should be empowered to retain its own advisors at the expense of the corporation. Directors are entitled generally to rely on the advice and opinion of professional advisers and other experts, including investment bankers, lawyers and accountants, provided that they have done so acting reasonably and in good faith. In a special committee process, the committee should ensure that its advisors are able to provide impartial advice which will be of assistance in demonstrating that the committee’s reliance on the advice was reasonable. These advisors assist the committee in understanding the legal, business and financial implications of the matters being considered and have an appropriate understanding of the regulatory and financial framework that should guide their decision-making.
• Document deliberations carefully and
contem-poraneously: The committee should ensure
that a reasonably contemporaneous record of the committee’s proceedings is prepared, preferably by a party who is in attendance for all portions of the committee’s deliberations, including any in camera session. In some cases, the secretary may be a member of management, although outside counsel should be considered as an alternative. At a minimum, outside counsel should maintain a record of in camera proceedings. Minutes should then promptly be reviewed and approved by committee members. In conducting this review, committee members should ensure that the minutes reflect the matters discussed and the advice obtained so that it is clear that the special committee focused on the important issues and proceeded in a thorough and informed manner. Any records of the committee should generally be main-tained in confidence at least until the committee has reported to the board and potentially longer depending on the circumstances.
• Consider timely disclosure requirements: The committee may need to cause the company to issue press releases in order to communicate with shareholders and other stakeholders in connec-tion with material developments. In unusual circumstances, the committee may need to issue press releases itself.
Where a corporation has a controlling shareholder that is a counterparty to a proposed transac-tion, the task of the independent directors can be thankless. On the one hand, the need for the committee to act independently is of particular importance. A competing factor the directors may face is that, under corporate law, the controlling shareholder has the power to replace the board. Nevertheless, special committee members are expected to act independently with the interests of the other affected stakeholders, including minority shareholders, in mind. In that regard, a controlling shareholder in these circumstances should have a similar interest in ensuring a process that is, and is seen to be, independent as the transaction will be less susceptible to challenge, thereby increasing deal certainty.
b) Consideration of Stakeholder Interests The stakeholder interests engaged will vary depending on the circumstances. In a change of control context, some obvious stakeholder groups to consider include shareholders and creditors as well as employees, suppliers and customers. Similar stakeholder groups may be engaged in other contexts as well; however, the expectations of those stakeholder groups may differ or carry differing weight. In the context of an allegation of wrongdoing, the principal interest at stake may be the long-term reputation of the corporation. • Identify affected stakeholders: A special
committee must be mindful that there are no overarching legal principles in Canada that dictate when a particular stakeholder interest takes precedence over another. Accordingly, the committee must appropriately identify and evaluate the stakeholders affected by its potential decision as well as the reasonable expectations of those stakeholders in the circumstances.
• Factors to consider in determining reasonable
expectations: Committee members may receive
some guidance from the following factors cited in various court decisions in determining whether or not a reasonable expectation exists:
• general commercial practice;
• the nature of the corporation, such as whether it is closely or widely held; • past practice, which may be subject to
change over time in response to valid com-mercial reasons;
• preventative steps the stakeholders might have taken to protect themselves against a potential board decision;
• representations and agreements, such as statements in offering documents, press releases, analysts’ calls, promotional material or other public communications.
• Monitor stakeholder reactions: In reviewing the fairness and reasonableness of the matter under consideration, the special committee should be kept advised of any complaints or other commentary from potentially affected stake-holders. In doing so, the committee will have a better understanding of the current thinking of stakeholder groups.
• Resolve stakeholder interests in a fair and
balanced way: Once the stakeholder interests
are identified, the committee will need to determine how the interests of those stake-holders may be impacted by the decision. The committee will be expected to resolve any conflict among stakeholders or stakeholder groups in a fair and balanced way. In circum-stances where a change of control is inevitable (often referred to as the corporation being “in play”), a committee may well determine that the most prudent course of action is to ensure a fair and efficient auction is conducted. In other circumstances, such as where a controlling shareholder has determined to sell its interest to a particular purchaser, Canadian courts have determined that an auction may not be appropriate based in part on the fact that the board has a more limited role in selecting a purchaser; however, in those circumstances, the board should attempt to ensure the most favourable transaction for minority shareholders in the circumstances. In that regard, Canadian courts have recognized that there is no single “blueprint” that directors must follow.
c) Ensure Adequate Investigation and Review of Information
To properly evaluate any decision, a committee must ensure that it has a proper understanding of the issues before it, including an understanding of all relevant facts and the risks involved in any proposed course of action.
• Gather and analyze sufficient information: The special committee should ensure that it has a proper understanding of the legal, business and
financial implications of any particular matter under consideration. In doing so, the com-mittee members should not accept advice or information without question, and should make appropriate inquiries.
• Communicate with management and the board
as appropriate: Management can be a valuable
resource to the committee given management’s intimate knowledge of the day-to-day affairs of the business. In the context of an M&A mandate, it may be appropriate for members of management to be involved in negotiations with potential bidders on behalf of, and subject to the direction of, the special committee or to act as intermediaries between the special committee and potential bidders. Any interac-tion with management should, however, be subject to consideration of any conflict in the interests of management with those that the committee is to serve.
• Take sufficient time: A special committee must not make decisions with undue haste. Whenever possible it is desirable for committee members to meet in person, particularly where significant decisions are to be made. It may be more appro-priate for a committee to delay a process for a period of time to allow it to make appropriate inquiries to ensure a complete understanding of the matters under consideration. The committee should ensure that relevant materials are deliv-ered prior to any meeting at which a decision is made and appropriate time is allotted for any expert presentations and proper discussion at the meeting.
d) Decision Within a Range of Reasonable Alternatives
The business judgment rule provides, among other things, that a board’s decision must be within a range of reasonable alternatives in order to gain deference from the courts. Provided that a special committee has undertaken a process with appropri-ate rigour and has been guided by independent advisors, it should have a clear understanding of the reasonable alternatives with respect to the decision it has been asked to make.
Ideally, the alternatives considered and the material reasons in favour of and against each such alterna-tive will be documented. In that regard, the ultimate disclosure and rationale for the decision made,
whether it is to the board, shareholders or a court can be as important as the decision itself.
• Documentation of alternatives considered: Throughout its process, the committee will be faced with many potential decisions, including many that may be ancillary to the principal decision at hand, such as decisions concerning disclosure, engaging advisors, and committee protocols. In each case, the committee should have a clear understanding of the reasons in favour of any course of action and how its deci-sions may impact its ultimate recommendations. When deliberating over its recommendations, the committee should ensure that it receives appropriate advice as to the alternatives avail-able, the risks and uncertainties in selecting any potential alternative as well as the factors that may favour one alternative over another. The committee should not be seen to have unduly disregarded or foreclosed pursuing potential reasonable alternatives.
• Ensure the adequacy of disclosure in applicable
disclosure documents: The committee should
ensure that it undertakes a careful review of applicable disclosure documents (including press releases, material change reports and information circulars), which may require discussions with management, advisors and others in order to resolve any questions or uncertainties. While a board decision may be subject to significant scru-tiny, any criticism will be blunted if the disclosure of the board’s decision-making process is clear, comprehensive and balanced. The disclosure should typically include the process by which the committee was established, a summary of its terms of reference, key milestones in the commit-tee’s review process, a description of the expert advice sought and the reasons why a particular course of action was selected.
12. When should a committee engage outside experts?
To ensure the deference afforded by the busi-ness judgment rule, a special committee should properly understand the various legal, financial, accounting and other issues that may arise in the course of the committee’s mandate and make appropriate inquiries where these issues are not fully understood. A common method of obtaining such understanding is for the special committee to engage expert advisors.
a) Engaging Experts
The committee’s mandate should empower it to determine when and whom to select as an independent expert advisor and set the terms of engagement. As part of negotiating the engage-ment letter, the committee should also clearly set out the expert’s compensation, which should be paid for by the company. The committee’s delib-erations concerning the engagement of its expert advisors should also be properly documented. When retaining an outside expert, the special committee should seek an expert that can provide impartial advice and guidance. The committee should directly negotiate the terms of engagement, ensuring that its engagement is proper in scope. Generally speaking, an outside expert should be charged with undertaking specific tasks, with appropriate standards of care, deadlines and reporting protocols, to ensure that the committee receives advice that is thoughtful, professional and comprehensive. Throughout its review process, the committee should also periodically evaluate the per-formance of the expert advisor, including whether it is adhering to the terms of its engagement.
As outside experts necessarily increase the costs to the organization, the committee should con-sider the appropriate time at which such experts are engaged. It is typically an easy decision for a committee member to conclude that an outside expert is needed as often the only downside is the added cost to the company; however, for that rea-son, the committee may wish to consider delaying an advisory engagement where it is uncertain that the expert will be needed.
b) Role of Experts
In some circumstances, the expert’s role will be quite specific and its involvement substantial. For example, in an insider bid, the committee will generally be required to retain an independent financial advisor to prepare a formal valuation. In those circumstances, the committee also will retain independent legal counsel who may act as primary legal counsel on the transaction from the perspective of the target, will negotiate the terms of the target company’s support, if such support is warranted, and will prepare the requisite disclosure documents.
In the context of an internal investigation, the com-mittee may retain forensic accountants or other investigative experts to review company records and may retain legal counsel to direct the inves-tigation and to provide advice in connection with any interaction with regulators or public disclosure obligations arising from the investigation.
In other circumstances, the advisor may provide more general oversight and will advise the committee on issues only as conflicts arise. For example, in the context of a company-initiated auction of a public company, a special committee may retain its own legal counsel to provide advice in tandem with the company’s legal counsel and to provide both a second opinion on certain matters and to advise on matters where the company’s legal counsel may be conflicted. In other circum-stances, the committee may rely generally on the advice of the financial advisor retained by the board of directors in connection with a transac-tion; however, the committee may at a later stage in the process retain its own financial advisor to provide a fairness opinion.
The question often arises in circumstances where a company has engaged a financial advisor to conduct an auction process who will receive a suc-cess fee for its services. Depending on a variety of factors, including the nature of the auction and the advisor’s compensation structure, the committee may choose to engage its own financial advisor on a flat fee basis at a later stage to provide an inde-pendent fairness opinion concerning a transaction; however, the committee may defer any such engagement until it appears likely that a transac-tion will proceed. A competing concern will be that the expert is engaged in sufficient time so that the advice given to the committee will be preceded by a thorough review and analysis by the expert. In other circumstances, at least at the initial stages of its engagement, a special committee may choose to rely on the advice of the company’s existing legal counsel given counsel’s familiarity with the business and affairs of the company. A committee should so proceed with caution as the company’s counsel also takes instructions from and engages with management and the other board members who may be conflicted. Should a committee choose to rely on the company’s coun-sel for advice, the committee should periodically
reassess whether independent counsel may be needed at a later stage in the process.
In making any decision concerning whether to engage independent experts, committee members should consider that courts often look to the independence of the advice that was received by the committee in evaluating the process by which a decision was reached.
c) Reliance on Experts
While formal legal and financial advice is often a necessity, the committee’s reliance on the advice must be reasonable. The committee should ensure that the advice is not accepted without question. Committee members should question the commit-tee’s advisors where appropriate and minutes of the meetings of the committee should reflect both the fact that the members have done so and the nature of the responses received.
13. What factors should be considered when selecting and engaging outside experts?
Directors are entitled generally to rely on the advice and opinion of professional advisers and other experts, including investment bankers, lawyers and accountants, provided that they have done so acting reasonably and in good faith after exercising appropriate judgment. As a result, a special com-mittee should take steps to ensure that its advisors are properly motivated, experienced and provide impartial and thoughtful advice.
a) Impartiality of Advice
When retaining advisors, the committee should consider the potential advisor’s past, current and reasonably foreseeable relationships with the other parties involved in the transaction to ensure that the advice received is independent. While it may be appropriate for the committee to inquire from management and others in the organization as to potential candidates, committee members should not necessarily confine their choices to those can-didates. Committee members should also consider their own contacts and those of the committee’s other independent advisors.
The committee should ask any prospective advi-sor to disclose, subject to any applicable rules of conduct, any such relationships. For example,
when selecting a financial advisor, the committee should consider whether the advisor has provided advice or other financial services to any of the parties to the transaction with an interest adverse to those that the committee represents. Committee members should review the potential conflicts of all advisors in much the same way as potential conflicts of the members themselves are to be reviewed by the board.
In the public M&A context where a company is conducting a market canvass or auction process, the company’s financial advisor may wish to offer debt financing (also referred to as “stapled” financ-ing) to prospective purchasers. This arrangement is not uncommon where the advisor is part of a larger group that offers institutional lending. The arrangement has its advantages given that it may enable more potential purchasers to submit offers given that financing is made available from a source already familiar with the company; however, the arrangement could lead to a questioning of the financial advisor’s independence. Among other things, the financial advisor generally stands to receive significant lending fees, which may exceed by a significant margin the financial advisory fees payable by the company in the event that a pro-spective purchaser completes a transaction using the credit advanced by the financial advisor. In
these circumstances, the special committee should consider whether to allow the financial advisor to offer stapled financing at all. If the committee does allow the financial advisor to offer such financing, the committee should ensure that the financial advisor provides sufficient comfort that the independence of its advice to the committee will not be compromised and may consider engaging a second advisor. In particular, the committee should consider engaging a separate financial advisor on a flat fee basis, with no success fee, who can provide a second opinion to the board. In light of judicial developments concerning advisor conflicts, a com-mittee is well-advised to ensure that shareholders have a proper understanding of the compensation arrangements of the committee’s advisors, includ-ing any success fee element.
In the context of an insider bid, the Special Transac-tion Rules prescribe certain relaTransac-tionships that preclude a financial advisor from being considered independent, in which case that advisor would be unable to prepare the formal valuation necessary in such a transaction. While the Special Transaction Rules impose these independence requirements on a financial advisor only when the advisor is to pre-pare a formal valuation, the relationships prescribed may be considered as indicative of the types of relationships that should be considered in all cases. In any retainer agreement with a financial advisor, regardless of whether or not the advisor is being retained to prepare a formal valuation, the commit-tee should seek an express representation from the advisor concerning its independence.
When retaining legal counsel, the committee should consider whether counsel has any ongoing or prior relationship with any of the parties involved in the matter for which the committee has been estab-lished. Applicable rules of conduct governing the legal profession may prevent the company’s legal counsel from acting for the committee in those circumstances; however, even where a legal conflict does not arise, it is often prudent for a special com-mittee to retain its own legal counsel to advise it separately from the company’s legal counsel. This is particularly important where management may be conflicted since members of management often will be the individuals instructing the company’s legal counsel on a day-to-day basis.
b) Experience and Reputation
When engaging an expert advisor, the committee should review the qualifications of the advisor to perform the task for which the advisor is to be retained. Canadian courts may assess the experi-ence and reputation of the committee’s advisors in evaluating whether a committee’s reliance on those advisors was appropriate.
The committee may wish to examine, among other things, the prospective advisor’s experience in similar matters and the resources available to the advisor. Other factors to consider include industry reputation, relevant expertise, geographic location and, where an organization is being engaged to provide advice, the experience and reputation of the particular individuals in the organization pro-posed to provide the advice. Ultimately, the advisor must be properly suited to the matter under review. While a larger advisory firm may be appropriate for some engagements, a smaller boutique firm or a particular individual with a special expertise may be more appropriate in other circumstances.
To the extent that time permits, it is prudent to consider, and request proposals from, more than one potential advisor prior to the selection of an advisor. Depending on the confidentiality of the committee’s mandate, the committee should bear in mind that, in making a request for proposals, confidentiality could be compromised depending on certain factors, including the number of advisors solicited and the size of the industry in which the advisor operates. To address this concern, the com-mittee may wish to rank its prospective advisors and then interview its first choice prior to contact-ing any other candidates. If that candidate proves acceptable, then no further interviews need to be conducted.
c) Compensation
When establishing the compensation to be paid to a special committee’s advisors, the committee should take care to ensure that the impartiality of the advice to be provided by the advisor is not compromised. Generally, the payment of customary professional fees to legal counsel, accountants or other professional advisors will not give rise to such concerns. The issue arises in connection with the compensation of financial advisors given that the compensation structure for these advisors often
